1. Field of the Invention
The present invention relates to evaluating insurance products. More specifically, the system relates to using software and computer systems to evaluate a group of insurance products based on a common derived set of output metrics.
2. Discussion of the Related Art
The financial services industry consists of industry segments such as insurance and banking. In turn, the insurance industry consists of industry segments such as life insurance, health insurance, and property and casualty insurance.
The life insurance industry includes product markets such as term life insurance, universal life insurance, variable life insurance, annuities, joint products, viatical settlements, preneed insurance, and long-term care insurance. Insurance carriers sell life insurance products through various distribution channels such as captive agents, independent agents, banks, affinity groups, and financial planners.
The present life insurance product markets for both insurance product proposals and in-force insurance products are inefficient. For insurance product proposals, the problem stems from: (1) an inadequate exchange of information between consumers and insurers during the selling process and, (2) the absence of a real-time auction market in which to price life insurance product proposals. Inefficient product markets for in-force insurance products stem from the absence of a system for measuring an insurance product's performance while that product is in-force.
An inadequate exchange of relevant and available information between consumers and insurers during the selling process is a significant source of product market inefficiency. Typically, consumers often do not receive relevant and available information necessary to make an informed purchase decision. Also, insurers frequently do not receive relevant and available information on the consumer and current market pricing necessary to tailor their proposals for optimal product performance and pricing. Such inefficient transmission of information results in product market inefficiency. Such product market inefficiency in the insurance industry adversely affects consumers and insurance companies.
Moreover, many life insurance products have complex features that consumers do not understand. Consumers' lack of insurance product knowledge opens the door to misleading sales practices such as twisting, churning, and vanishing premiums. Product “gimmickry,” such as lapse basing, preys on a consumer's inability to detect its existence. Recent, widely publicized accounts of race-based underwriting indicate that market conduct problems can go undetected for years by consumers, insurance company managements, and insurance industry regulators. Insurance industry regulators have attempted to enforce market conduct standards. Insurance companies have sought to curtail sales abuses. Their efforts have not solved the problem.
Market conduct problems occur regardless of an insurance company's financial strength. Favorable financial ratings are no indication of an insurer's compliance with market conduct standards. Independent rating firms evaluate an insurer's claims paying ability. They do not rate the products sold by insurers. The life insurance industry has no product rating system that appraises a proposed insurance product's total value to the consumer.
These and other market conduct problems point to the need for a system that assists the consumer in appraising a proposed insurance product's value.
The life insurance industry is fragmented. Over a thousand insurers populate the industry, and product commoditization prevails. Product commoditization is common in fragmented industries, brings about price competition, and shrinks margins. Life insurers yearn for product differentiation.
Many insurers have high financial and counterparty credit strength ratings that are assigned by rating agencies such as Standard & Poor's, A.M. Best, Moody's and Fitch. But a high rating is no source of product differentiation. It is a prerequisite for selling insurance through certain distribution channels such as wirehouses, independent broker-dealers, and banks. Rating agencies intend for a financial strength rating to serve as a measure of an insurer's claims paying ability. Counterparty credit ratings gauge the creditworthiness of an insurer's debt securities.
The ubiquity of financial strength ratings underscores a struggle insurers face in their search for product differentiation. Rating agencies do not rate life insurance and annuity products.
For intermediaries and consumers, life insurance can be a complex and frequently confusing product. Intermediaries struggle with analyzing and comparing insurers' products and achieving credibility in their recommendations. Sound policy purchase or retention recommendations require informed evaluations of both policy value and the insurer's financial strength. Making unsupported recommendations is risky, and product complexity can make evaluating and recommending a policy difficult and subjective.
Consumers usually have no way of objectively knowing whether a policy proposal is better, worse, or about the same as other policies available in the marketplace. This can result in decisions based on no information, bad information, or even irrelevant information, such as relying on the perceived quality or the financial strength rating of the insurer offering the policy.
No system exists for embedding real-time, objective product value comparisons into the life insurance selling process. Similarly, no system for rating the value of an existing policy's expected future performance is available in the marketplace. The life insurance industry has been stuck with an inefficient way of doing business that gives up margin to product commoditization and where product complexity gets in the way of closing sales.
For these reasons, the challenges facing life insurance companies and intermediaries in selling life insurance point to an unmet need for independent life and annuity product ratings. Efficient Markets was founded to fill this unmet need.
Likewise, other financial products, including mortgages and other complex loans, for example, have costs, fees, expenses, and tax considerations beyond principal and interest rate, that vary greatly among borrowers and lenders, and are similarly difficult to evaluate precisely and objectively.